It is not hard to find a book about how to make the federal government more efficient by abolishing a few cabinet agencies here and a score of agencies there.
These agencies are the usual suspects: the Departments of Education, Commerce and Energy, to name a few. These books, largely unread, are met with a collective yawn. Nothing new here. Congress tried to abolish a few of those very agencies in 1995. President Clinton vetoed the bill, the federal government shut down and the rest is history.Along comes John Tamny with a better, or at least more provocative, idea: Shut down the Federal Reserve. One can almost feel the collective gasp for oxygen in Washington as the defenders of the status quo would shriek in dismay if the Tamny proposal were to become reality.
Whether the U.S. central bank is ever abolished or not, Tamny’s “Who Needs the Fed?” is an easy read for both those familiar and unfamiliar with our nation’s capital and the Federal Reserve Board. A legacy from the President Wilson administration (now vilified as a racist regime by the apostles of political correctness), the Fed dictates interest rates and regulates the banking sectors as the most opaque agency in Washington. “How does the Fed set interest rate policy?” an unassuming member of Congress might ask in an oversight hearing. “None of your business” is the not-too-polite response.
The book, published by Encounter Books on May 24, will appeal to the mass of readers who are more comfortable with singer Taylor Swift than Stanford Professor John Taylor and who have heard of actor Warren Beatty but not Sen. Elizabeth Warren.
Tamny takes a look at the Fed from many different perspectives. He makes the common-sense observation that keeping interest rates low does not generate economic growth. So much for “quantitative easing,” the Fed’s policy of maintaining low interest rates and keeping much of federal debt on the Fed’s opaque balance sheet rather than the transparent balance sheet of the Treasury Department.
Without the Fed, we wouldn’t miss the artificially low interest rates or the mysterious minutes from the Federal Open Market Committee, but who would print the money? The Mint, a division of the Treasury Department, could go on printing it under the guidance of the Treasury secretary, who could use a Taylor Rule, pegging the growth in the money supply to gross domestic product growth.
Tamny makes the radical proposition that we could eliminate public money altogether.
“Money is merely an accepted measure of value, and absent a central bank, it would still come into existence because it’s so useful,” he writes. If the Mint didn’t print dollars, someone else would — or we could use Bitcoins, or euros, or pounds sterling.
I’m not sure policymakers want to eliminate dollars or the Fed, but some in Congress are talking about having more control over the Fed’s activities. Last week the House Oversight and Government Reform Committee passed Kentucky Rep. Tom Massie’s Federal Reserve Transparency Act, which would open the Fed to audits and increased scrutiny. The bill now goes to the House floor.
Much of Tamny’s book rings true, but his assertion that the Fed’s low-interest-rate policies have not fueled the increase in stock prices left me doubtful, especially since this contradicts luminaries such as Carnegie Mellon Professor Allan Meltzer. Those on fixed incomes who were planning on getting a 5% return on their savings accounts in retirement have been forced to go to the stock market for higher returns. They are taking undue risks in order to make ends meet, driving up equity prices.
Tamny writes that if the Fed caused the bull market, it would “have been one of the few instances in global economic history of price controls actually leading to abundance over scarcity.” I would suggest that the high levels of stock prices are not “abundance,” but an artificially inflated bubble that will burst as soon as rates return to normal historical levels. In contrast, the increase in stock prices in the 1980s represented real growth.
The Fed is not likely to disappear soon, but neither are the compelling arguments Tamny makes in “Who Needs the Fed?” Taken to heart, Tamny’s arguments are likely to lead at least to a Federal Reserve more accountable to Congress and the American public. That would be a welcome outcome.
This article originally appeared on MarketWatch
Diana Furchtgott-Roth, former chief economist of the U.S. Department of Labor, directs Economics21 at the Manhattan Institute. You can follow her on Twitter here.
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